However, for someone disciplined, taking a 30 year mortgage and paying it off like a 15 year mortgage with significant over payments is a good strategy. It means if you need to tighten your belt you can always drop down to the normal payment for a spell without so much as having to speak to the bank.
The worst option is to take the 30 year mortgage and then buy the larger house that the longer period allows you to afford.
In real terms cash is losing significant money every year while assets are gaining money. Debt makes sense as long as you have a margin of safety and can multiply the impact with leverage.
IF you believe inflation will be significant over 30 years say, and can lock in a low rate, it is better to go with a longer term.
If you think the return of your investments will >= 3% mortgage rates then you're losing money by not taking on debt (albeit with a bit of risk).
This being the utter fucking fallacy of hypothesising with the benefit of perfect information.
It's not a trick, it's simple maths. It certainly doesn't always work, and there are risks involved, so not everyone will agree on the right decision, but there is clearly a path where borrowing money to pay for a large asset makes sense.
Imagine a more extreme example:
Interest rates 0.1%, Inflation 10%, 30 year term, leverage meaning your 50k becomes say 500k invested.
Now it makes sense to take on as much debt as you can get over say 30 years, and to put off paying it as long as possible, because even after a few years the payments will be quite minor compared to your inflating income, and at the end of the 30 years the debt you have left and the interest payments on it will be trivial compared to your income.
This is the worst of both worlds. You pay the interest penalty of a 30 year, with the payment of a 15 year (well, slightly more). The interest difference between a 30 and 15 year mortgage is about 30% (2.x% v 3.x% APR).
I did a 15 year mortgage, then refinanced it every 12m or so ($250 each time), resetting the payments back to 180 months each time. That way, I get the interest savings of a 15 year, which is significant, and each refinance makes your payment quite a bit lower because a 15 year loan actually pays back principal. After six years, my mortgage will be the same as it would have been if I originally got a 30 year, but it will be paid off in 21 years instead of 30.
There's a risk interest rates rise, or I lose my job and can't refinance. But so far, so good. And honestly, my mortgage now is so close to what it would have been with an original 30 year loan that it doesn't even matter if I can never refinance. The hardest part was the first two years.
Depends on how much better the same amount of money would perform if invested in an index fund. It could be more profitable to throw the difference in monthly payments into a vanguard account instead of a higher 15yr monthly payment.
Personally my view is exactly your second point: Buy small enough that you can consistently put $x extra each month against the principle + one full extra payment each year. It's a good middle ground to maintain flexibility
And absolutely-- buying the biggest you can fit into monthly expenses may even seem responsible: "I'm not living beyond my means!" but is a razors edge of risk for unanticipated expenses or more significant life disruptions.
Purchase a house where you can afford the 15-year fixed mortgage, but take out the 30-year fixed mortgage. Pay it off as if it were the 15-year fixed (ensure that your loan has no penalties for prepayment or extra payments, and that 100% of extra payments go toward the principal).
If things go smoothly for you, you’ll pay a marginal amount of additional interest (because your % will be higher as a 30-year than a 15-year). However, if you run into cash flow issues, you have a good amount of reduction in mortgage payments that you can make while keeping the bank completely satisfied.
Obviously if a bond paying 3% would be interesting to you, pay the mortgage off first before buying the bond.
Essentially, I don't expect my overall happiness and satisfaction to be linearly correlated with my finances, and I expect that non-linearity to be such that I'd rather be more risk-averse in such a way that I have to give up some of the potential gain.
If there were a world where I could _guarantee_ the avg. stock market return, then I'd of course take that offer, but sadly such guaranteed returns only exist in the form of scams and ponzi schemes.
You're right about the compound interest, but compound interest can work for you as well.
That said, I don't think they exist in the US.
But consider a thought experiment where you could borrow $1m at a low rate of interest, suppose 3%, from a generous lender who requires no collateral and requires an amortizing repayment. You take the $1m and reserve, say, $100k in "no-touch" cash (your cushion) and invest the remainder in the market, and suppose that the market returns an average of 7% over the long run.
In this scenario, you obviously pay much more interest than not taking the loan. The interest you pay is nearly $500k, which sounds like a lot - almost half the loan! Yet you make a tidy profit over 30 years: after paying back the loan, you have a portfolio worth over $4 million, plus the $100k reserve you still have.
While that's just a thought experiment, the math works fairly similarly for a mortgage. So long as the market returns more (over the long term - it'll be bumpy short term) than the cost of money, you will be paid handsomely for assuming lots of long-term, fixed low-interest debt and investing the proceeds.
And this leads to a second surprising conclusion: you should not pay off your mortgage. Once you've built equity, releverage the house and borrow more, so long as you take the proceeds and invest it in an instrument that will pay more than the cost of money over the long run. If interest rates rise, the math might not work.
This is bad advice for some people, because a pile of savings and investments can be a tempting target to use for luxury vehicles, or boats or whatever, and that can upset the math, although eventually you make enough with it that might be OK. But for people who can live as if those investments were illiquid, it's quite a rewarding path.
And for some people, the psychological value of living in a house with no mortgage exceeds whatever financial gains come from continuing to pay for a mortgage. And while there's nothing wrong with that, it does come at a stiff financial cost.
As long as mortgage money is cheap, the most profitable course of action is to use the 30 year mortgage, but keep a large chunk of money in reserve and invest the rest in the market for the long term. And never allow yourself to not be well-cushioned.
Debt gets people in trouble when they use it to get things that put them on the edge, where losing a job causes them to miss a payment. For people who stay far away from the edge, and are good with money, it's very profitable.